VZCZCXYZ0000
RR RUEHWEB

DE RUEHNC #0264/01 1140850
ZNR UUUUU ZZH
R 230850Z APR 08
FM AMEMBASSY NICOSIA
TO RUEHC/SECSTATE WASHDC 8731
INFO RUEHBS/USEU BRUSSELS

UNCLAS NICOSIA 000264 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
DEPT FOR EEB/TPP/ABT/ATP (JANET SPECK) AND EUR/SE 
 
E.O. 12958: N/A 
TAGS: EAGR EAID ETRD ECON PGOV PREL CY
SUBJECT: RESPONSE: IMPACT OF RISING FOOD/AGRICULTURAL COMMODITY 
PRICES -- CYPRUS 
 
REFS: (A) STATE 39410, (B) NICOSIA 224 
 
(U) This cable is sensitive but unclassified.  Please protect 
accordingly. 
 
¶1. (SBU) Following is our response on the impact of rising 
food/agricultural commodity prices in Cyprus, keyed to Ref A 
questions. 
 
DEMAND:  Cyprus has an open, prosperous economy and continues to 
enjoy an abundance of imported foods and agricultural commodities 
sufficient for the needs of both the local population and large 
tourism sector, despite rising food prices internationally.  Higher 
food prices are painful for lower-income groups and the 
competitiveness of Cyprus' tourism sector.   However, to keep things 
in perspective, these price increases will cause no more than a dent 
in the country's historically strong growth rates. 
 
Cereals, which have experienced staggering price increases in recent 
months, are an important input of the Cypriot economy. 
Locally-produced grains satisfy only about 10 percent of demand -- 
the rest has to be imported.  The Cyprus Grain Commission (CGC), 
which still maintains a near-monopoly in grain imports, made a good 
call last year when it bought large quantities of forward positions 
in cereals, at prices substantially below present levels (for 
example, it bought wheat at Euros 237 per ton back in August 2007, 
compared to the present prices of around Euros 280 per ton).  Being 
a semi-government organization, the CGC refrained from pocketing the 
difference and passed on the benefits to consumers, thereby 
shielding them, to some extent, from the price increases seen 
elsewhere.  However, the end of (relatively) cheap grain is near for 
Cyprus too, as those stocks will be depleted in about a month.  The 
CGC is currently hoping for a reversal of the present rally in 
cereal prices.  Otherwise, it will be forced, sooner or later, to 
pass the burden on to the public. 
 
SUPPLY:  Agriculture generates barely 3.1 percent of GDP (2007) and 
is steadily shrinking further.  The main export crops are potatoes 
and oranges.  There is little evidence to suggest that domestic 
agricultural production is responding to changes in prices, at least 
so far.  Even the severe water shortage currently facing Cyprus has 
made little difference on agricultural production, as water for 
agriculture remains heavily subsidized.  Farmers are something of a 
"sacred cow" in Cyprus, forming a formidable political constituency, 
which no administration (least of all, the present one committed to 
"social progress") can afford to offend.  The strong Euro helps 
cushion, to a certain extent, higher energy prices for Cyprus and 
the rest of the Eurozone. 
 
POLITICAL IMPACT:  The rise in food prices has attracted a lot of 
press coverage in recent months and some protests by consumer 
organizations, although these have been kept very civilized without 
any hint of violence.  There is no threat to the stability of the 
host government or any friction between social classes over food 
prices.  Cyprus has always been vehemently opposed to agricultural 
biotech, thanks to a very vocal Green party.  Similarly, public 
sentiment towards biofuels was never positive, while the recent 
increases in food prices internationally only help deepen local 
resentment of biofuel. 
 
ECONOMIC IMPACT:  Over the last decade, Cyprus has enjoyed very low 
inflation, usually slightly over 2.0 percent, and only rarely 
exceeding 4.0 percent.  In 2007, overall inflation remained low: 2.2 
percent, only marginally higher than the Eurozone's 2.1 percent. 
Inflation rose steadily towards the latter months of 2007. 
Additionally, in the sub-category of Food and Non-Alcoholic 
Beverages, inflation rose by 5.5 percent -- fully double the overall 
increase.  These trends have gathered steam in the first quarter of 
¶2008.  Inflation in Cyprus reached 4.7 percent by March 2008, 
compared with 3.5 percent in the Eurozone.   Similarly, inflation in 
the Food and Non-Alcoholic Beverages sub-category rose by 7.0 
percent in Q1, considerably above the overall average. 
 
Higher inflation in recent months is putting a strain on Cyprus' 
Purchasing Power Parity (PPP) vis-`-vis the rest of the EU.  In 
2007, Cyprus' PPP reached 93.7 percent of the EU 27 average (EU 27 = 
100), recording steady gains in recent years.  However, this trend 
is expected to be reversed in 2008, with Cyprus' PPP declining to 
92.8 percent of the EU 27 average by year-end.  The brunt of this 
burden will be borne by lower-income households, which spend about 
31 percent of their income on foodstuffs, compared to 10 percent for 
the highest-income households, and an average 15 percent for all 
households.  So, the impact of higher food prices ranges from 
"considerable" to "negligible," depending on each household's income 
level. 
 
ENVIRONMENTAL IMPACT:  Rising food prices as such have not had any 
discernible environmental impact in Cyprus.  Instead, Cyprus' main 
 
environmental problem, namely a severe water shortage, is 
attributable to a prolonged drought and poor planning (Ref B). 
 
GOVERNMENT POLICY RESPONSE:  The recently-elected left-wing 
(nominally, Communist) administration appears appropriately 
concerned about rising food prices, particularly as they affect 
poorer people disproportionately.  The administration keeps a close 
watch on prices and competition domestically, fending off cartels 
and excessive profiteering as best as it can while adhering to free 
market principles.  In terms of direct assistance to the population, 
the administration announced an Easter bonus for pensioners as soon 
as it got elected to help lessen the blow from rising food prices. 
The previous administration also fought hard, and eventually won 
from Brussels, a derogation leaving Value Added Tax (VAT) on 
foodstuffs and medicines at zero. 
 
IMPACT ON POST PROGRAMS:  Post has serious funding problems but 
these are generally unrelated to rising food prices. 
 
POLICY PROPOSALS:  So far, rising food prices have not been a focus 
of GOC policy planning.  We suspect that, over time, this will 
become a more serious issue for Cyprus given its high reliance on 
imported grain, but it will take its policy lead from decisions made 
by the EU as a whole. 
 
SHLICHER